Adapted from the original article by Matt Weller, FOREX.com:
“USD sell-off on Trump’s Powell threat; EUR/USD, GBP/USD, USD/JPY”
Source: https://www.forex.com/en-us/news-and-analysis/usd-sell-off-on-trump-s-powell-threat-eur-usd-gbp-usd-usd-jpy/
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U.S. Dollar Weakens Following Political Jitters and Comments from Former President Trump
The U.S. dollar experienced a notable sell-off amid rising political noise, largely driven by comments made by former President Donald Trump. During a recent interview, Trump hinted at a potential plan to replace Federal Reserve Chair Jerome Powell if re-elected. This development sparked uncertainty across financial markets, particularly foreign exchange, where traders began to reevaluate the stability of U.S. monetary policy under a possible second Trump administration.
Trump’s remarks raised concerns that Powell’s independence may be under siege, thereby undermining investor confidence in the Fed’s ability to act independently of political pressure. The dollar’s weakness was felt across several major currency pairs, including EUR/USD, GBP/USD, and USD/JPY.
Understanding the Trump-Powell Dynamic
– Former President Trump has a long-standing history of criticizing Powell, especially during his first term.
– Trump often expressed frustration with the Federal Reserve’s interest rate hikes during his presidency, arguing that they hindered economic growth.
– If elected again, Trump has not ruled out the possibility of replacing Powell before the end of the current term, which ends in May 2026.
– This raises the broader policy question: Would monetary policy under a second Trump administration be more politicized, potentially weakening the Fed’s perceived independence?
These revelations rattled financial markets, especially the U.S. dollar, as traders reassessed the risk associated with holding USD-denominated assets amid an unsettled policy outlook.
Immediate Market Reaction
The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, fell sharply following the news. Markets quickly priced in the increasing likelihood of dovish pressure on the Federal Reserve should Powell face early dismissal or increased political interference.
– The Dollar Index slipped by nearly 0.3% intraday after Trump’s comments circulated.
– Sovereign bond yields fell across the curve as investors hedged against potential volatility and a more accommodative monetary policy environment.
– Equity markets showed mixed reactions, as a potentially lower interest rate environment was partially offset by fears of institutional instability.
Traders are acutely aware that leadership instability at the Federal Reserve increases uncertainty, which usually equates to a weaker currency. This is especially significant as the U.S. economy navigates a complex landscape of inflation moderation, potential rate cuts, and continued geopolitical tensions.
EUR/USD: Euro Takes Advantage of Dollar Weakness
The euro capitalized on dollar weakness in the wake of Trump’s comments, pushing EUR/USD toward key resistance levels. While recent economic data out of the eurozone has been mixed, the euro’s strength is more a function of dollar decline than robust European fundamentals.
Technical and Fundamental Highlights:
– EUR/USD climbed toward 1.0850, breaking through several short-term resistance levels.
– A weaker U.S. dollar provided the primary driver, though some support came from stabilizing eurozone consumer sentiment and a slight uptick in business confidence indicators.
– The European Central Bank (ECB) has also hinted at pausing rate cuts or slowing policy easing, contrasting potential dovish developments in the U.S.
Key Resistance and Support Levels:
– Immediate resistance is near 1.0860, which marks the 2024 high so far.
– A break beyond this level could target 1.0950 and eventually 1.1000.
– Support sits around 1.0740, with further backing at the 50-day moving average near 1.0700.
While the medium-term outlook for the EUR/USD remains uncertain due to macroeconomic headwinds
Explore this further here: USD/JPY trading.